As EU cracks down on rule of law, Croatia still wrestling with longstanding shortcomings

The EU’s inaugural rule of law report, released on September 30th, laid bare the wide gaps between the bloc’s member states in terms of everything from anti-corruption measures to judicial independence.

As Politico summarized the comprehensive assessment, the EU-27 fell into five broad “tribes”. At the bottom of the pack, unsurprisingly, were Hungary and Poland, both of which have faced Article 7 proceedings over serious rule of law breaches. Bulgaria, where protests over allegations that Prime Minister Boyko Borisov’s government allowed an oligarchic mafia to capture state institutions recently entered their 100thconsecutive day, was deemed the “worst of the rest”.

Croatia, meanwhile, received a middling assessment that placed it in the “tribe” of countries which, despite some progress, still face an uphill battle in carrying out essential reforms. The judiciary remains one important sticking point—the rule of law report condemned Croatia for insufficiently ensuring the independence of its courts.

The EU also noted that, while Zagreb has made progress overall in reducing logjams in the judicial system, Croatia’s courts still have a remarkable backlog of cases linked to a single controversial government measure—a forced conversion of Swiss franc (CHF) loans that left international lenders flabbergasted and has seen Zagreb warding off a flood of legal complaints, most recently from Hungary’s OTP Bank.

On top of these judicial problems and the lingering fallout from the populist loans conversion, Croatia’s scandal du jour—the revelation that countless politicians and businessmen were mixing at a secret club in Zagreb in the company of escorts, free-flowing booze and funds of dubious provenance—seems to confirm polls finding that cronyism and corruption remain widespread in the country, highlighting another issue which successive governments in Zagreb have failed to address.

OTP lawsuit highlights unresolved problem with CHF loans

The recent news that Hungary’s OTP Bank, Central Europe’s largest independent lender, is suing the Croatian government to recoup 224 million kuna (roughly €30 million) in damages is just the latest indication that Zagreb’s disastrous 2015 decision to convert CHF-denominated loans to euros has done lasting damage to Croatia’s reputation and piled pressure on its overburdened judiciary. Despite pressure from international investors, the European institutions and a number of Croatian politicians, Zagreb has yet to stem the fallout from the loans conversion.

When Croatia’s Social Democrats pushed through the measure before parliamentary elections in November 2015, it undoubtedly seemed like low-hanging fruit to bolster their sagging electoral chances—the thousands of Croatian borrowers who had taken advantage of CHF-denominated loans’ low interest rates had looked on in dismay as the value of the Swiss franc soared after its peg to the euro was dropped. Not only did the forced loans conversion fail to save the election for the Social Democrats, the populist measure’s knock-on effects were quickly apparent. It landed Croatian banks, 90% of which are subsidiaries of parent companies from elsewhere in the EU, with a roughly €1 billion bill, cramping their liquidity and sparking a flurry of legal actions.

The European Commission recommended that Zagreb rethink the “disproportionate” measure; the European Central Bank warned that the conversion’s retroactive effect conflicted with EU directives and that the law would negatively impact Croatia’s financial sector and spook foreign investors. Croatian Foreign Minister Miro Kovac lamented that the loans conversion had not been thoroughly thought out, while independent Finance Minister—currently also the Deputy Prime Minister—Zdravko Marić hoped to find a compromise with the banks which had been left out in the cold by the loans conversion.

Five years after the ill-advised legislation, the OTP lawsuit is likely to ratchet up the pressure on Marić— already struggling to keep BAT, the largest foreign investor in Croatia, from leaving the country over concerns about Croatia’s business climate—to finally find a solution that will alleviate overseas investors’ preoccupations and tamp down the mounting pile of CHF loans cases weighing down the Croatian judiciary.

Corruption still the name of the game

Marić is no doubt acutely aware that cronyism remains the other major thorn in Croatia’s side. After all, the finance minister was intimately involved in the spectacular collapse of fraud-ridden Agrokor—once Croatia’s largest private company—and even faced an investigation at one point over potential conflicts of interest between his ties to the food firm and his work in the government. Two recent surveys highlighted in the EU rule of law report, however, have underscored just how serious the problem is. A full 91% of Croatian companies reported that corruption is widespread, while a staggering 97% of the country’s citizens indicated the same.

As if to confirm this perception, a fresh scandal has unfolded over the past few weeks, with Croatian newspaper Jutarnji list lifting the lid on a secret club in Zagreb where Croatia’s political and business elite—everyone from President Zoran Milanović to three ministers in the current government—hobnobbed, including while most citizens were abiding by strict coronavirus lockdown rules. Inside the club, owned by Dragan Kovačević, the former CEO of oil pipeline operator JANAF who was arrested last month for influence peddling and bribery, alcohol flowed as freely as suitcases full of cash and escorts were shuttled across the border from Serbia.

If graft scandals are nothing new in Croatia, the who’s who list of powerful politicians and businessmen who reportedly visited Kovačević’s underground club has nevertheless driven home how entrenched cronyism still is. Combined with the stark survey results highlighted in the recent EU rule of law assessment and civil society groups’ determination that Croatia has lost ground in the fight against corruption, rather than gained it, since joining the EU in 2013, it’s no surprise that Croatia received its fair share of criticism in the inaugural rule of law report.

Decreasing tolerance in Brussels?

One of the reasons behind the first EU-wide report card of how its member states are stacking up on upholding democratic principles was to demonstrate that the European institutions are keeping an eye on rule of law violations throughout the bloc, rather than just in a few commonly-cited “troublemakers” like Poland and Hungary.

The report is just one encouraging indication that Brussels is growing more serious about sealing lingering gaps in good governance. “We were naïve in the past”, Values and Transparency Commissioner Věra Jourová admitted when the report came out. “It’s quite clear that we have to increase the pressure to show [rule of law and EU values] are the principles of the club”. With the past few weeks demonstrating what an uphill battle the EU’s newest member still faces, it’s high time that Brussels becomes more involved in pressing for the bloc’s rules and values to be more equally applied across its constituent countries.

Image: By SDP Hrvatske - http://www.sdp.hr/aktualno/narodna-koalicija-potpisala-sporazum-zajednickom-izlasku-izbore/, CC BY 3.0, https://commons.wikimedia.org/...

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Gary Cartwright

Gary Cartwright

Gary Cartwright is publishing editor of EU Today.

An experienced journalist and published author, he specialises in environment, energy, and defence.

He also has more than 10 years experience of working as a staff member in the EU institutions, working with political groups and MEPs in various policy areas.

Gary's latest book WANTED MAN: THE STORY OF MUKHTAR ABLYAZOV: A Manual for Criminals on How to Avoid Punishment in the EU is currently available from Amazon

https://www.amazon.co.uk/WANTE...

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